Carbon Credits - An impetus to cleaner technology


By

Keerthini J
Lecturer
MBA Department
SJB Institute of technology
Bangalore
 


Background

Burning of fossil fuels is a major source of industrial greenhouse gas emissions, especially for power, cement, steel, textile, fertilizer and many other industries which rely on fossil fuels (coal, electricity derived from coal, natural gas and oil). The major greenhouse gases emitted by these industries are carbon dioxide, methane, nitrous oxide, hydro fluorocarbons (HFCs), etc., all of which increase the atmosphere's ability to trap infrared energy and thus affect the climate.

The concept of carbon credits came into existence as a result of increasing awareness of the need for controlling emissions. The IPCC (Intergovernmental Panel on Climate Change) has observed that:

Policies that provide a real or implicit price of carbon could create incentives for producers and consumers to significantly invest in low-GHG products, technologies and processes. Such policies could include economic instruments, government funding and regulation,

While noting that a tradable permit system is one of the policy instruments that has been shown to be environmentally effective in the industrial sector, as long as there are reasonable levels of predictability over the initial allocation mechanism and long-term price.

The mechanism was formalized in the Kyoto Protocol, an international agreement between more than 170 countries, and the market mechanisms were agreed through the subsequent United Nations Framework Convention on Climate Change. The mechanism adopted was similar to the successful US Acid Rain Program to reduce some industrial pollutants.

United Nations Framework Convention on Climate Change

165 nations signed the 1992 United Nations Framework Convention on Climate Change (UNFCCC) at Rio de Janeiro. The Convention divides countries into two main groups - Annex I & Non-Annex I. Countries. Annex I (developed countries) agreed to reduce their GHGs by 5.2 % below 1990 levels in 1st commitment period 2008 2012

Convention is based on three principles

Common but differentiated responsibility

Precautionary approach

Sustainable Economic Growth and Development

The Kyoto protocol defined how to bring down the emissions in COP 3 in 1997

Kyoto protocol

The Kyoto Protocol treaty was negotiated in December 1997 at the city of Kyoto, Japan and came into force February 16th, 2005.

The Kyoto Protocol is a legally binding agreement under which industrialized countries will reduce their collective emissions of greenhouse gases by 5.2% compared to the year 1990 (but note that, compared to the emissions levels that would be expected by 2010 without the Protocol, this target represents a 29% cut). The goal is to lower overall emissions from six greenhouse gases - carbon dioxide, methane, nitrous oxide, sulfur hexafluoride, HFCs, and PFCs - calculated as an average over the five-year period of 2008-12. National targets range from 8% reductions for the European Union and some others to 7% for the US, 6% for Japan, 0% for Russia, and permitted increases of 8% for Australia and 10% for Iceland.

The Kyoto mechanisms

Under the Treaty, countries must meet their targets primarily through national measures. However, the Kyoto Protocol offers them an additional means of meeting their targets by way of three market-based mechanisms.

The Kyoto mechanisms are:

  • Emissions trading known as "the carbon market" 
  • Clean development mechanism (CDM)
  • Joint implementation (JI).

The mechanisms help stimulate green investment and help Parties meet their emission targets in a cost-effective way.

Under International Emissions Trading (IET) countries can trade in the international carbon credit market to cover their shortfall in allowances. Countries with surplus credits can sell them to countries with capped emission commitments under the Kyoto Protocol. Carbon, like any other commodity, has begun to be traded on India's Multi Commodity Exchange and has become first exchange in Asia to trade carbon credits.

Under the Clean Development Mechanism (CDM), a developed country can 'sponsor' a greenhouse gas reduction project in a developing country where the cost of greenhouse gas reduction project activities is usually much lower, but the atmospheric effect is globally equivalent. The developed country would be given credits for meeting its emission reduction targets, while the developing country would receive the capital investment and clean technology or beneficial change in land use. Projects which are compliant with the requirements of the CDM mechanism generate Certified Emissions Reductions (CERs).

Under Joint Implementation (JI) a developed country with relatively high costs of domestic greenhouse reduction would set up a project in another developed country. Projects which are compliant with the requirements of the JI mechanism generate Emissions Reduction Units (ERUs).

Monitoring emission targets

Under the Protocol, countries actual emissions have to be monitored and precise records have to be kept of the trades carried out.

Registry systems track and record transactions by Parties under the mechanisms. The UN Climate Change Secretariat, based in Bonn, Germany, keeps an international transaction log to verify that transactions are consistent with the rules of the Protocol.

Reporting is done by Parties by way of submitting annual emission inventories and national reports under the Protocol at regular intervals.

A compliance system ensures that Parties are meeting their commitments and helps them to meet their commitments if they have problems doing so.

Adaptation

The Kyoto Protocol, like the Convention, is also designed to assist countries in adapting to the adverse effects of climate change. It facilitates the development and deployment of techniques that can help increase resilience to the impacts of climate change.

The Adaptation Fund was established to finance adaptation projects and programmes in developing countries that are Parties to the Kyoto Protocol. The Fund is financed mainly with a share of proceeds from CDM project activities.

The road ahead

The Kyoto Protocol is generally seen as an important first step towards a truly global emission reduction regime that will stabilize GHG emissions, and provides the essential architecture for any future international agreement on climate change.

By the end of the first commitment period of the Kyoto Protocol in 2012, a new international framework needs to have been negotiated and ratified that can deliver the stringent emission reductions the Intergovernmental Panel on Climate Change (IPCC) has clearly indicated are needed.
 

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Source: E-mail February 1, 2011

          

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